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Simple Calculators Aren’t Enough

June 16, 2017

This time we hear from Ilene Davis, a financial advisor with Cocoa, Fla.-based Financial Independent Services. She tells us about her experience offering financial projections to clients and how she’s learned the value of robust resources.

When I got started in the financial advisory business about 30 years ago, I was at a large firm that is no longer in business. Most of the training we received was about what to sell and how to sell it. We got little training in making sense of what choices were best for clients. But over the years I’ve realized that helping clients make the best choices involves challenging calculations, both financial and emotional.

Not long ago, I met with a couple who had been working with another financial advisor for about a year. The wife was already retired and the husband was wondering how soon he could join her so they could start enjoying more time together. The big question for them was whether the husband should take a lump sum payout from his pension or the fixed payments option.

There are a number of factors to consider in this scenario, of course, including the age of retirement, lifetime expectancy, lifestyle preferences and risk tolerance, among others. The couple told me they weren’t satisfied with the projections and possibilities their previous advisor had provided. The scenarios he’d presented seemed to change without much explanation.

From the way they described the situation, it occurred to me this advisor may have been relying on just one software program for his projections — and perhaps one that didn’t do a very good job of incorporating various assumptions into its forecasts.

If that was the case, I sympathized with his plight. Over the years, I have been frustrated with these types of products. I can’t believe some of the assumptions the programs make — or don’t make, as the case may be. These programs can make it very difficult to customize the scenario for the needs of a particular client.

Ilene Davis

Ultimately this couple ended up working with me. I was able to give them clear options based on assumptions that related directly to their lives.

Clients often come into my office with a preconceived idea about what they should do, often in terms of whether a lump sum or fixed pension is the best choice for them. But after careful consideration of the options and assumptions I present to them, they typically end up making a different — and better — choice.

But to be able to change their minds, clients need to feel confident that all their pertinent factors are being accounted for. And for you to feel confident of the same thing, you need to have robust financial planning tools that you know well and that take all the relevant information into account.

It’s also important for advisors to be upfront about the assumptions they’re using in these calculations. For example, if a client wants to assume they’ll live to 85, I always suggest adding another five years. Or if a client wants to assume market returns will be greater than 6%, I have them sign a waiver acknowledging that goes against my recommendation. The important thing is to make sure there’s clarity between the advisor and client about the assumptions you’re both making.

I could go on about all the nuances of deciding between a lump sum or fixed pension, but the important thing is for advisors to be up to speed on the best financial planning tools available so they can be clear with their clients about how they’re coming up with their suggestions.

Of course, it would help if they were also mathematically and financially adept. But at minimum, they should closely review their available tools and whether they adequately serve their clients’ needs.